Technology Drives North American Gas Renaissance: New CERA Analysis

CAMBRIDGE, Mass.--(BUSINESS WIRE)--North American natural gas is entering a new era in which supply is no longer constrained, according to a new Cambridge Energy Research Associates (CERA) multiclient study, Rising to the Challenge: A Study of North American Gas Supply to 2018. A revolution in technology has unlocked “unconventional” gas resources, dramatically changing the prospects for the market. Demand, rather than supply, will be the challenge for the market going forward, accentuated currently by the economic crisis.

“Growing North American production will decrease North America’s need for LNG (liquefied natural gas), triggering changes in projected LNG flows and potentially affecting prices and the viability of projects worldwide.”

In Rising to the Challenge, CERA, an IHS Inc. (NYSE: IHS) company, has developed its supply outlook based upon detailed analysis of gas fields and then tested it using its North American gas market modeling capabilities to provide a supply analysis at the play level that is integrated with CERA’s market outlook. The study concludes that the North American natural gas market can now be largely supplied by North American gas production.

The main driver of supply growth in the years ahead will undoubtedly be unconventional gas production, which has benefited disproportionately from technology. Domestic gas producers explored a variety of technologies to exploit the known unconventional resource base. The success of these efforts became evident in 2007-2008 when production in the lower 48 United States grew rapidly - from a 2007 low of 49.8 billion cubic feet per day (Bcf/d) in February to 56.7 Bcf/d in July 2008, an increase of 6.9 Bcf/d and almost 14 percent in just 17 months.

This achievement has been realized even as a painful recession has taken hold. Rising to the Challenge concludes that future North American gas production will be limited primarily by demand, which is falling sharply due to the global economic crisis. The market is struggling to absorb existing production – as reflected in the current price trend – rendering new drilling in higher cost areas uneconomic.

“North American gas production is no longer opportunity constrained,” said one of the authors of Rising to the Challenge, CERA Senior Director Robert Ineson. “Resource-bearing shales and tight sands are extensive, and North America now has a sufficient inventory of drillable prospects to maintain or, if necessary, increase productive capacity for at least the next ten years – even after the current recession becomes a memory.”

The success of technology in unlocking unconventional resources has meant higher-volume wells. Combined with the effects of the recession, this means that the cost of new gas supplies will be lower for the immediate future. However, as the economy rebounds, key commodity prices will rise again, driving new gas production unit costs up as well. Full cycle unit costs are expected to increase from a weighted average of $4.63 per thousand cubic feet (Mcf) in 2009 to $7.54 per Mcf in 2018.

Given the increased productivity of unconventional wells, the study concludes that it is not necessary to increase drilling activity to maintain – or increase – production. After years of developing unconventional gas with its long-lived production, in the aggregate, the average decline rate will fall. This means, the study says, that a smaller quantity of new production is required to offset natural production declines. CERA does expect production to increase, with dry gas productive capacity growing from an average of 53.5 Bcf/d in 2009 to 60.6 Bcf/d in 2018 in the lower 48 United States, and from 15.8 Bcf/d in 2009 to 19.6 Bcf/d in 2018 in Canada.

“The supply renaissance in North America will have global consequences. The development of unconventional gas is reshaping the outlook for natural gas supplies in North America, with far-reaching significance for the industry, consumers, and the global gas business,” added Ineson. “Growing North American production will decrease North America’s need for LNG (liquefied natural gas), triggering changes in projected LNG flows and potentially affecting prices and the viability of projects worldwide.” LNG will remain competitive in North American markets, but will compete more with higher cost conventional supplies than unconventional gas.

Rising to the Challenge: A Study of North American Gas Supply to 2018 builds on the landmark CERA multiclient study Diminishing Returns: The Cost of North American Gas in an Unconventional Era. To learn more about the study, please visit http://www2.cera.com/rising or contact Ken Downey at kdowney@cera.com.

CERA is an IHS Inc. (NYSE: IHS) company.

About CERA (www.cera.com)

Cambridge Energy Research Associates (CERA), an IHS company, is a leading advisor to energy companies, consumers, financial institutions, technology providers and governments. CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA is based in Cambridge, MA, and has offices in Bangkok, Beijing, Calgary, Dubai, Johannesburg, Mexico City, Moscow, Mumbai, Oslo, Paris, Rio de Janeiro, San Francisco, Tokyo and Washington, DC.

About IHS (www.ihs.com)

IHS (NYSE: IHS) is a leading global source of critical information and insight, dedicated to providing the most complete and trusted data and expertise. IHS product and service solutions span four areas of information that encompass the most important concerns facing global business today: Energy, Product Lifecycle, Security and Environment. It serves customers ranging from governments and multinational companies to smaller companies and technical professionals in more than 180 countries. IHS is celebrating its 50^th anniversary in 2009 and employs approximately 3,800 people in 20 countries.